Dow +1.63%, S&P 500 +2.13%, Nasdaq +2.89%, Russell 2000 +2.95%, SOX +4.25%, Eurostoxx +0.91%, SMI +0.20% .
Last night I swam in Lake Geneva (the real one, not Geneva, which is a figment of Swiss tourism). The water temperature was supposed to be around 27 degrees, and I suddenly wondered what my reaction would be if it dropped to 26. I highly doubt that would have motivated me to down a dozen bottles of champagne at once. Well, that’s pretty much what happened yesterday on Wall Street, which threw the party of the year after the release of the consumer price index for the month of July.
Let’s put things in context. Everyone has understood that the overall price level has been rising rapidly for many months and that this is a serious problem that needs to be addressed immediately, please. The Fed is doing its job by rapidly raising interest rates. The problem is that in May, inflation continued to grow, and in June, impatience began to grow in our cottages. However, a “miracle” happened yesterday: the US Department of Labor announced an increase in inflation by 8.5% in annual terms. This is less than the 8.7% expected by economists. This decline is mainly due to a drop in energy prices last month, which offset increases in food and housing prices. We agree that the 8.5% increase in price in July 2022 compared to July 2021 is still huge, but the market is concluding that the pass has been passed and the decline may begin and the bears boom!
The reaction to all asset classes is instantaneous and quite binary. Note that recent US economic statistics have been more than encouraging (ISM for services, employment report). Throw in yesterday’s consumer price report and you have a cocktail we’ll call a soft landing. It is clear that the probability of a soft landing for US growth is increasing, the specter of recession is receding somewhat, and the market is starting to dream of a more accommodative Fed. The CME FedWatch model now indicates a 28% chance of a 75bp hike. at the September 21 meeting, compared to 65% prior to the release of the inflation report, so the market is easing. This is where we must try to keep our wits about us. One month is not a trend, but what is undeniable is that with the bulls beating the bears yesterday, the probability that the market will bottom on June 17 is increasing.
The S&P500 ( SPX ) breaks sharply at the open, only to look no further in the rearview mirror and close at a session high, carried north by its little brother the Nasdaq100 ( NDX ), which is operating in “Space X” mode. and earns 2.85% per session. The NDX (also the Nasdaq Composite by the way) has now recovered more than 20% from the June lows, forcing it to re-enter a bull market, this is anecdotal and completely useless for the future, but the Ruby services have fooled us so much with their bear market, that this is the only fair game. The SPX is moving away from its 100-day moving average, now eyeing its 200-day, but not yet in sight (4332 points vs. yesterday’s close of 4210 points). Volatility stumbles to the mat, the VIX (SPX Volatility) index falls 9.5% to close at 19.74, key support at 15. Trading volumes are not exceptional with 10.6 billion securities traded on the NYSE, in addition , we are not seeing massive covering of short positions, at least not yet.
In terms of sectors, it was no surprise to anyone to see growth stocks leading the way last night. Today’s SPX podium consists of materials, consumer goods and technology. The spread (the difference between closing stocks versus falling stocks) is clear: +90% for the SPX and NDX.
Apart from the jubilant kingdom of stocks, which rarely lives up to its name so well, the bond market remains in cautious mode, with the US 2/10-year yield curve falling from -47 basis points to -42 basis points this morning, still pointing to recession fears , the difference in perception of stocks and bonds today is surprising… Dollar starts to fall, recovers but still trades below its pre-report level, EUR/USD is trading at 1.0314 this morning. Oil is again trying to break $90 a barrel WTI Light Crude, encouraged by the weakness of the dollar, it needs to break $95 to re-enter the uptrend. Gold is breathing above $1,800 an ounce, but it is running out of oxygen and is quickly returning to $1,786.
San Francisco Fed chief Mary Daly says it’s too early to talk about victory in the fight against inflation, but she may support a slower pace of rate hikes, the FT reports. A colleague at the Minneapolis Fed, Neil Kashkari, calls the idea of the central bank starting to cut rates next year “unrealistic” when inflation is expected to be well above its 2% target. Mr Kashkari, now the Fed’s number one hawk, still sees rates at 4.4% at the end of 2023. The Fed wants to dampen the enthusiasm of the stock market, and probably rightly so, yesterday’s statistics are certainly encouraging, but only the first step in a long road leading to a quiet household purchasing power.
Liz Truss’s thoughts on how to deal with the Bank of England add to the list of threats to the pound and UK government bonds. The fear is that if she becomes prime minister, Ms Truss will reverse a three-decade focus on fighting inflation and ask politicians to use tools that were discredited in the 1980s. and sterling,” says Gordon Shannon of TwentyFour Asset Management.
Scrooge McDuck can rest easy on his pile of gold as Walt Disney shares jumped in the session after the streaming service jumped 38% as subscriber growth beat forecasts. The company added 14.4 million new Disney+ users in the quarter, bringing the number of subscribers across all its streaming platforms to 221 million, more than Netflix. Theme park growth helped beat sales and earnings. According to Bloomberg Intelligence, the big-eared title is set to end 2022 in style.
Two macro statistics in the United States today at 2:30 p.m.: producer prices and weekly jobless claims.
Daimler Truck: In the second quarter, the group posted an adjusted profit of 1 billion euros, well above analysts’ expectations thanks to strong demand and positive currency effects. Deutsche Telekom: German telecom operator raises profit forecast. Siemens AG: The group has a loss due to a significant impairment of Siemens Energy. Revenues are slightly ahead of expectations, but targets are lowered due to depreciation. Zurich Insurance: The group announces a 1.8 billion franc share buyback program on the sidelines of its quarterly report. Partners Group is selling 50% of USIC to Kohlberg in a $4 billion deal. ABB buys its Nema low-voltage motor business from Siemens. Boeing delivered its first 787 Dreamliner in more than a year. Roche receives continued approval for Ventana in the US.
Indices are trading higher in Asia this evening and this morning. Tokyo was closed, Hong Kong was up 2.25%, Shanghai was up 1.56% and Seoul was up 1.73%. The future SPX does not return a millimeter of ground, on the contrary, it receives 19 additional points. Europe opens up 0.6%. The simple fact that the inflation rate came in lower than expected caused a general sense of relief in the markets, this is the main reaction. Now let’s see how the market interprets these numbers over time.